Court Overturns OK of Sony-BMG Unit Merger

BRUSSELS, Belgium -- An EU court overturned the European Commission's approval of the merger between the music units of Sony and Bertelsmann AG on Thursday, forcing the companies to request clearance for the deal again.

Both Sony and BMG said they would study the ruling and discuss next steps with the commission, but did not believe the decision undermined their business.

"Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004," Bertelsmann said in a statement.

The surprise ruling is the first time the courts have overturned a commission decision to clear a deal and analysts said it could raise the stakes for other such mergers or even lead companies to call off talks. EMI Group PLChas been trading takeover offers with Warner Music Group in recent months.

The Court of First Instance _ the EU's second-highest court _ backed a challenge by the independent record label group Impala, which represents 2,500 independent music companies. The court said regulators did not properly show in 2004 that there was not a monopoly position before the deal or that there would not be one afterward.

Either one would be enough to strike down regulatory approval.

The European Commission had unconditionally approved the 50-50 joint venture between Japan's Sony Music Corp. and BMG, Bertelsmann's music unit, in July 2004 after finding insufficient evidence the deal would harm consumers.

The court said regulators did not clearly show why they made a late U-turn after alleging in May 2004 that the deal could exacerbate "tacit collusion" in the industry, leading to higher CD prices and less choice for consumers in a market where there is already too little competition.

Even after it cleared the merger, regulators warned that they would watch the industry closely.

The deal, which reduced the number of major music companies from five to four, brought Sony artists like Aerosmith, George Michael and Barbra Streisand and BMG's Avril Lavigne and Elvis Presley under one roof. Sony and BMG argued they needed to join forces to deal with declining CD sales and the threat from illegal downloading on the Internet.

Regulators had assumed there was no record industry monopoly because there were a variety of products on the market and no open disputes between the five main companies.

But the court found that regulators did not properly support a theory that promotional discounts ultimately prevent a monopoly from occurring.